Harvard study finds increased minimum wages contribute to restaurant failures in California’s Bay Area

[Highmark]

Oops.  

Harvard study finds increased minimum wages contribute to restaurant failures in California’s Bay Area

By ERIN SHANNON  |  

BLOG

 

Apr 19, 2017

 

 

A new study by the Harvard Business School has found that higher minimum wages in California’s Bay Area have resulted in an increase in overall restaurant closures in the region.  The less expensive and lower rated the restaurant, the greater the impact.  The study also found higher minimum wages caused fewer new restaurants to open.

The study, "Survival of the Fittest: The Impact of the Minimum Wage on Firm Exit”, examined the impact of higher minimum wages on the thousands of full and limited-service restaurants in the cities surrounding the San Francisco Bay, which includes major cities like San Francisco, San Jose, and Oakland.  Cities in that region have led the nation in passing laws increasing local minimum wages.  Among the 41 cities and counties that have increased minimum wages at the local level since 2012, 15 were in the Bay Area, with 21 total Bay Area minimum wage increases during the study’s sample period from 2008 through 2016.  The minimum wages in more than a dozen Bay Area cities have increased, or are set to increase, in 2017.

Since restaurants are one of the largest employers of minimum wage workers, one would logically expect the impacts of an artificially high minimum wage to be evident in that industry before others.  In a national survey of restaurant owners, 24% said rising minimum wages are their biggest challenge for 2017.

The data from the Harvard study bears this out—higher minimum wages have increased overall failure rates for Bay Area restaurants.   The study found that a $1 increase in the minimum wage increases the overall likelihood of a restaurant going out of business by 4% to 10%.  

Those numbers are significantly higher for less-expensive and lower-ranked restaurants (as defined by ratings denoted by the number of stars awarded on the review platform Yelp), which the study revealed are disproportionately impacted by increases to the minimum wage.  After accounting for the fact that a less expensive, lower-quality restaurant is already closer to the margin of failure, the study found a higher minimum wage further increases the likelihood of that restaurant failing.

According to the Harvard study data, a $1 increase in the minimum wage leads to an alarming 14% increase in the likelihood of closure for a 3.5-star restaurant (which is the median rating), but had no discernible impact for a top rated 5-star restaurant.  So the lower-ranked restaurants that cost less have a harder time surviving the increased labor costs of a higher minimum wage.

Just as concerning is the study’s finding that the entry rate of restaurants also declined as minimum wages increased—a $1 increase in the minimum wage corresponds to a 4% to 6% reduction in the number of new restaurants opened.

As the lead researcher of the University of Washington study on Seattle’s minimum wage law has said, increasing the minimum wage is a double-edged sword that “creates winners and losers.” 

In the Bay Area study, the winners are the expensive, 4 and 5-star restaurants and its employees.  Those establishments typically pay workers more and so are not as likely to be impacted by the increased labor costs of a higher minimum wage.  Even if they are impacted, their patrons are willing to pay top dollar for a 5-star meal and service, so increasing their menu prices doesn't have the same impact as a restaurant that caters to a lower price point.  And since those restaurants pay workers more and diners tip more generously, making those jobs more valuable, they can choose to only hire workers with experience and proven skills.

The losers are the less expensive and lower-ranked restaurants and its employees who increasingly find themselves at risk of losing their job, which makes it even more difficult for them to garner the experience and learn the skills they need to compete for the better paying jobs at the higher quality restaurants (which according to the Harvard study come with the added benefit of much greater job security).  Also losing are the new workers trying to enter the job market with little or no skills or experience—they have fewer job opportunities altogether because new restaurants were not opened at all.  Also losing are the diners who find themselves with fewer lost cost dining choices.

Last year, before signing California’s landmark $15 minimum wage bill, Governor Jerry Brown acknowledgedthat, “economically, minimum wages may not make sense.”  The results of the Harvard study are proving him right.

http://www.washingtonpolicy.org/publications/detail/harvard-study-finds-increased-minimum-wages-contribute-to-restaurant-failures-in-californias-bay-area

Edited June 9, 2017 by Highmark

[ArcticCrusher]

Our LibTard government in Ontario is raising min wage to 15 over the next two years even though their data shows raising the min wage by 10% results in a youth job loss of 6%. Min wage right now is $11 something.  They are doing this to try and survive the next election onslaught.

[ICEMAN!]

The less expensive and lower rated the restaurant, the greater the impact.

 

Shitty restaurants closing because they suck.  Oh well.  They likely would have ended up closing anyway if they have shitty ratings.

[Momorider]

1 hour ago, ArcticCrusher said:

Our LibTard government in Ontario is raising min wage to 15 over the next two years even though their data shows raising the min wage by 10% results in a youth job loss of 6%. Min wage right now is $11 something.  They are doing this to try and survive the next election onslaught.

Going from 11.60 October 1st to 14.00 Jan 1 2018 will cause some major pain and job loses 15.00 isn't till a year later

[xtralettucetomatoe580]

27 minutes ago, ICEMAN! said:

The less expensive and lower rated the restaurant, the greater the impact.

 

Shitty restaurants closing because they suck.  Oh well.  They likely would have ended up closing anyway if they have shitty ratings.

Wow. Insightful debate of the study. Lol

[Mainecat]

I noticed while in Canada they paid their waiters and waitresses fair. Many were happy because they got their healthcare especially single women with kids.

[Momorider]

2 minutes ago, Mainecat said:

I noticed while in Canada they paid their waiters and waitresses fair. Many were happy because they got their healthcare especially single women with kids.

they make even less than regular minimum wage, FUCK you are a lying sack of FUCK

[Mainecat]

1 hour ago, ICEMAN! said:

The less expensive and lower rated the restaurant, the greater the impact.

 

Shitty restaurants closing because they suck.  Oh well.  They likely would have ended up closing anyway if they have shitty ratings.

I find more and more prices are going through the roof on meals and they are getting smaller. 24 bucks for a low grade steak at a franchise restaurant is insane. They load it up with so much salty rub it could be a fuckin shoe.

[Mainecat]

1 hour ago, Momorider said:

they make even less than regular minimum wage, FUCK you are a lying sack of FUCK

Not when I was in Quebec

[ICEMAN!]

7 minutes ago, Momorider said:

they make even less than regular minimum wage, FUCK you are a lying sack of FUCK

Depends on the type of restaurant momo

[Highmark]

Another liberal outlet with another negative article on higher MW's.   Poor Anler.  

Higher Minimum Wage May Have Losers

CHICAGO — A growing number of economists have found that many cities and states have considerable room to raise the minimum wage before employers meaningfully cut back on hiring.

But that conclusion may gloss over some significant responses to minimum-wage increases by individual employers, according to two new studies. And those reactions may, in turn, raise questions about the effectiveness of the minimum wage in helping certain workers.

The findings, presented over the weekend at the annual meeting of the American Economic Association, the nation’s premier gathering of academic economists, come as many cities and states are raising their minimum wages. California and New York last year approved gradual increases to $15 per hour. Proponents argue that raising the minimum is one of the most practical ways of improving living standards for the working poor and reducing inequality.

To test that proposition, John Horton of New York University conducted an experiment on an online platform where employers post discrete jobs — including customer service support, data entry, and graphic design — and workers submit a proposed hourly wage for completing them.

Mr. Horton, working with the platform, was able to impose a minimum wage at random on one-quarter of about 160,000 jobs posted over roughly a month and a half in 2013. If a worker proposed an hourly wage that was below the minimum, the platform’s software asked him or her to raise the bid until it cleared the threshold. In some cases the minimum wage was $2 per hour, in some cases $3, and in some cases $4.

At first glance, the findings were consistent with the growing body of work on the minimum wage: While the workers saw their wages rise, there was little decline in hiring. But other results suggested that the minimum wage was having large effects. Most important, the hours a given worker spent on a given job fell substantially for jobs that typically pay a low wage — say, answering customer emails.

Mr. Horton concluded that when forced to pay more in wages, many employers were hiring more productive workers, so that the overall amount they spent on each job changed far less than the minimum-wage increase would have suggested. The more productive workers appeared to finish similar work more quickly.

The traditional way most studies determine if employees are hiring a different kind of worker after the minimum wage rises is to consider certain characteristics, like race, age and education level.

The problem is that one worker can be much more productive than another with the same demographic profile, potentially masking the productivity upgrade that Mr. Horton documents. He was able to overcome this problem because the platform gave him access to precise data reflecting productivity, like past wages.

When the minimum wage increased, employers tended to hire workers who had earned higher wages in the past, suggesting that they were looking for a more productive work force.

If the pattern Mr. Horton identified were to apply across the economy, it would raise questions about whether increasing the minimum wage is as helpful to those near the bottom of the income spectrum as some proponents assume. The higher minimum wage could cost low-skilled workers their jobs, as employers rush to replace them with somewhat more skilled workers.

“There’s nothing about my paper that says raising the minimum wage is a bad idea — it may be that the trade-off is worth making,” Mr. Horton said. But there is “this consideration we probably haven’t considered.”

Some economists are skeptical that employers would respond the way Mr. Horton describes if an entire city or state increased its minimum wage, as opposed to just a single employer or subset of employers.

“I think the way to relate this result to the real world labor market is to consider what would happen if Walmart had to raise wages,” said Arindrajit Dube, an economist at the University of Massachusetts at Amherst, who has studied minimum wage laws.

Walmart has said that after it increased wages in 2015, it was able to attract more productive workers.

“This experiment is probably telling us much the same thing,” Mr. Dube added in an email. “But if we want to know what would happen if N.Y. or C.A. raised its minimum wage to 15/hr, I doubt that this online experiment — neat as it is — will shed much light.”

When the minimum wage goes up for everyone, it is not so easy for employers to substitute better-skilled workers because the new minimum would not offer a more attractive wage. In many cases, more highly skilled workers see their wages rise after minimum-wage increases to keep them above the new minimum, making it all the more difficult to lure them away.

Zane Tankel, chief executive and equity partner in a group that owns and operates several dozen Applebee’s restaurants in the New York City area, said replacing low-skilled workers with higher-skilled ones after the state’s recent minimum-wage increases is “not something that we try to do.”

Mr. Tankel argued that differences in the productivity of low-level workers in his industry are not very big. “It’s just a lot more money for the exact same job description,” he said. He is accelerating automation in his restaurants, including tablet devices for ordering certain items and payment, to offset the costs of the higher minimum.

Mr. Horton is quick to acknowledge that there are many reasons his experiment might not capture employer behavior in the wider economy. But he says a higher minimum wage could attract more highly skilled workers who were not previously in the labor market — say, college students. At the same time, less-skilled workers might lose their jobs and drop out of the labor force.

More broadly, he said, the contribution of his paper is to show that one impulse of many employers in the face of a minimum-wage increase will be to find more productive workers, even if there are limits on how much they can follow through on this desire.

“There are lots of reasons to think this is probably happening and we haven’t detected it because we don’t have the data,” he said. “I know in my career, people have fine-grained opinions about who’s better than who, and we talk about them endlessly. We’re constantly ranking. But when we talk about other labor markets, we pretend the same distinctions don’t exist.”

A second study presented at the conference suggests another way that employers may respond to a rising minimum wage: simply going out of business.

The husband-and-wife research team of Michael Luca of Harvard Business School and Dara Lee Luca of Mathematica Policy Research identified the ratings of tens of thousands of restaurants in the San Francisco area on the website Yelp and found that many poorly rated restaurants tend to go out of business after a minimum-wage increase takes effect.

By contrast, highly rated restaurants appear to be largely unaffected by minimum-wage increases, and over all, there is no substantial rise in restaurant closings after a minimum-wage increase.

Though the couple’s study is still being refined and they have yet to explore the reason, one possibility is that workers at poorly rated restaurants tend to be less productive than workers at highly rated restaurants, making it difficult for those restaurants to survive when paying workers more. (It’s also possible that highly rated restaurants are better able to pass rising costs on to their customers.)

The results are broadly consistent with a 2013 study by the economists Daniel Aaronson, Eric French and Isaac Sorkin, showing that a sizable minimum-wage increase in New Jersey resulted in many lost jobs as numerous businesses closed, but an almost offsetting number of new jobs as other businesses opened, which the authors argue were more productive.

[ArcticCrusher]

3 minutes ago, Mainecat said:

I find more and more prices are going through the roof on meals and they are getting smaller. 24 bucks for a low grade steak at a franchise restaurant is insane. They load it up with so much salty rub it could be a fuckin shoe.

Where the fuck do you go to eat steak?  About $40 around here for anything I would touch.

[ArcticCrusher]

1 minute ago, ICEMAN! said:

Depends on the type of restaurant momo

Its the min, they can pay whatever more if they choose.

 

Its lowers since most make tips as well.

Edited June 9, 2017 by ArcticCrusher

[ICEMAN!]

1 minute ago, ArcticCrusher said:

Its the min, they can pay whatever more if they choose.

 

Its lowers since most make tips as well.

No, there is a restaurant/bar server minimum wage that is less than the minimum that would apply to a non-licensed restaurant 

[Let it Snow!]

1 hour ago, ArcticCrusher said:

Our LibTard government in Ontario is raising min wage to 15 over the next two years even though their data shows raising the min wage by 10% results in a youth job loss of 6%. Min wage right now is $11 something.  They are doing this to try and survive the next election onslaught.

Business partner and I have already discussed having to sell both of our restaurants, 36.1% increase in min wage in 18 months isn't feasible for a lot of small business.. She's definitely trying to save face, hopefully the masses will see through it.

[Let it Snow!]

13 minutes ago, ICEMAN! said:

Depends on the type of restaurant momo

In my business' (pizza joints) min wage is min wage unless under 18, then student min wage applies. I haven't seen whether or not the libs are ditching that or if it will still apply.

[Let it Snow!]

15 minutes ago, ArcticCrusher said:

Where the fuck do you go to eat steak?  About $40 around here for anything I would touch.

He's in the states $24 is our $40    

[Mainecat]

There is too many restaurants these days. Biggest business failure rate.

[racer254]

35 minutes ago, Mainecat said:

I noticed while in Canada they paid their waiters and waitresses fair. Many were happy because they got their healthcare especially single women with kids.

Another debacle created by liberal ideas.

Gotta love how you snowflakes justify all the bs.  "they would have gone out of business anyway"  UMMM yeah OK

Edited June 9, 2017 by racer254

[ArcticCrusher]

6 minutes ago, Let it Snow! said:

He's in the states $24 is our $40    

He's easy pickins.

[Let it Snow!]

7 minutes ago, Mainecat said:

There is too many restaurants these days. Biggest business failure rate.

 

A lot of successful restaurants run on small margins but are still able to survive while making a descent income. These changes in Ontario will bury many.

[ArcticCrusher]

22 minutes ago, ICEMAN! said:

No, there is a restaurant/bar server minimum wage that is less than the minimum that would apply to a non-licensed restaurant 

I know, Momo is correct.  Admit it.

[ArcticCrusher]

12 minutes ago, Let it Snow! said:

In my business' (pizza joints) min wage is min wage unless under 18, then student min wage applies. I haven't seen whether or not the libs are ditching that or if it will still apply.

That's a tough business.

[Let it Snow!]

1 minute ago, ArcticCrusher said:

That's a tough business.

We've managed to do well so far, come Jan 1 will likely be a different story.

[ICEMAN!]

19 minutes ago, ArcticCrusher said:

I know, Momo is correct.  Admit it.

No because he is lumping all restaurants together.  Many do pay the provincial minimum wage rate.